The UK Government has published its long-awaited Energy Bill alongside confirmation that nuclear generation is to form a growing part of the UK's future energy mix. While the Bill, and accompanying Nuclear White paper, are largely seen as a new chapter for nuclear and renewables, the Bill provides detailed provisions updating and strengthening the legislative framework for the offshore oil and gas sector which will impact on LNG infrastructure, carbon and natural gas storage, requirements for decommissioning of offshore installations and wells and the Model Clauses relating to petroleum licences.
The Nuclear White Paper
Following a court-ordered second consultation into the future of nuclear energy in the UK, the Government has once again concluded that nuclear does have a role to play in the next generation of Britain's power plants. Citing energy security and CO2 reduction as the primary reasons for giving nuclear the green light, the Government's White Paper on Nuclear Power addresses the comments and concerns raised in the 2700 responses to the previous consultation exercises.
The White Paper acknowledges that the decision to take nuclear power forward as a viable option will involve putting an appropriate regulatory framework in place, and also undertaking a package of facilitative actions, including:
- improving and expediting the process for obtaining planning approval by requiring consideration to be given to policy and regulatory issues that have already been determined, undertaking a Strategic Siting Assessment and also a Strategic Environmental Assessment to identify suitable criteria potential sites would have to meet, and preventing such considerations having to be revisited at each planning application;
- initiating a Justification process, issuing a time-limited call for applications in February/March 2008;
- continuing the Generic Design Assessment programme for the approval of reactor designs to speed up the nuclear site licensing process;
- reviewing the regulatory regime with the regulators with a view to making it operate more effectively for the nuclear industry;
- strengthening the Emissions Trading Scheme to improve investor confidence; and
- ensuring decommissioning and clean up costs are borne by the private sector operators of nuclear power stations, as set out in the Energy Bill.
The White Paper envisages a National Policy Statement endorsing new nuclear power, together with a revised regulatory framework that would result in the commencement of the construction of new nuclear power plant in 2013/2014, with the first of the new fleet being switched on in 2018. In the meantime, the Energy Bill makes specific provision for decommissioning and site clean-up for any site for which an application to build a nuclear power station is made after the date that the new provision comes into force.
Chapter 1 of Part 3 of the Energy Bill addresses the planning and funding of decommissioning and clean-up for new nuclear installations. On the face of it, the Bill addresses one of the key concerns raised in relation to proposals for new nuclear: who will pick up the cost of dealing with the nuclear legacy. Essentially, responsibility for planning and funding decommissioning and clean-up are transferred to the private sector from being activities that have historically been undertaken at the taxpayers' expense.
As with the decommissioning regimes for offshore oil and gas and renewable energy installations (discussed below), provision is made for liability for nuclear decommissioning and clean-up obligations to be extended to an "associated" body corporate of a site operator. However unlike in relation to the other regimes, an associated party, for the purposes of the nuclear decommissioning provisions under the Bill will include an entity holding, or entitled to acquire or receive, 20% or more of the issued share capital or voting rights in contrast to a threshold of 50% for the other regimes.
The proposed legislation requires a "funded decommissioning programme" to be approved by the Secretary of State before a new nuclear site can be used. Using a site without having such a programme approved, or failing to adhere to an approved programme once using the site, will each be criminal offences, carrying economic and even custodial sanctions. Existing nuclear site licence holders will not, however, be exposed to these offences: the obligations will only apply to applicants for new nuclear site licences who are proposing to use the site for the purposes of power generation (although the Secretary of State is granted powers to widen the group of nuclear site licence applicants to whom the provisions of the Bill will apply).
The programme should set out technical details of the treatment and disposal of hazardous waste arising while the installation is in operation, plus the costed arrangements for decommissioning and clean-up of the site post-operation. In addition to setting out how much decommissioning will cost, potential operators will have to put in place arrangements to safeguard such funding, and to ensure that when the decommissioning costs ultimately arise, there is sufficient security in place to meet them.
The details of these arrangements are yet to be prescribed, but it is expected that the owner/operator of a new nuclear power plant will have to make contributions into an independent fund during the operating lifetime of the installation. The fund would then be used exclusively to cover the costs of decommissioning and waste management.
The Government does concede that where such accumulated funds are insufficient, it "may be called upon to meet the costs of ensuring the protection of the public and the environment", although this would be in extreme circumstances, and the possibility of such a scenario should be "remote at all times". However, should such a scenario arise, the White Paper does state that operators should have "adequate financial safeguard mechanisms in place to top up an insufficient fund", although it is unclear what these safeguards may be, and the Energy Bill does not address this further.
The White Paper also suggests that operators' liability for decommissioning and clean-up costs could be fixed or capped, albeit at a high level, and should include a significant risk premium above expected costs. This concession, given in response to the consultation submissions, is designed to bring certainty to operators of what their decommissioning costs will be, and therefore to encourage them to go ahead with their plans to build new nuclear power plants. Details of this and all aspects of funding the decommissioning and waste management liabilities are to be considered in a further consultation on draft guidance for the contents of an approvable funded decommissioning programme to be published later this year.
The Renewables Obligation
A number of changes to the administration of the Renewables Obligation regime have been introduced by the Energy Act 2004 and the Climate Change and Sustainable Energy Act 2006 since its introduction in 2002. Part 2 of the Energy Bill contains provisions that will replace the enabling sections of the Electricity Act 1989 in their entirety by the insertion of new sections 32- 32M into the 1989 Act. The provision contained in the Bill will retain the main structure of the Renewables Obligation, but introduce a number of reforms to the way the regime works in practice: suppliers will continue to have to present certificates to the Office of Gas and Electricity Markets (Ofgem) or pay a penalty; and the buy-out fund will continue to be recycled to promote competition in the renewables market (although Ofgem will now be able to deduct its costs from the fund). The proposed changes will mean that the Renewables Obligation can be banded to provide differentiated support levels for different technologies. The available level of support will be set out in a new Renewables Obligation Order to be made by the Secretary of State who must have regard to the actual costs of generating from the different renewable sources (including transmission or distribution costs) and a number of other considerations:
- the income of generators in respect of each of the renewable sources, or from activities associated with the generation of electricity (including the supply of heat, or sale of by-products);
- the impact of the exemption from the Climate Change Levy for those generators;
- the desirability of securing the long term growth and viability of industries associated with generation from the renewables source;
- the likely effect of the proposed banding on the number of ROCs issued by Ofgem and the impact on the ROC market and on consumers; and
- the potential contribution of electricity generated from each of the various renewable sources to the attainment of any target relating to the generation of electricity,or of energy production, which arises from a target imposed by, for example, an EU Directive.
The Government has already consulted on the banding proposals. The Government's response document, published the same day as the Energy Bill, confirmed that the banding would range from 0.25 ROC/MWh for landfill gas as "established" technology to 2 ROC/MWh for "emerging" technologies including wave, solar photovoltaic and some biomass plants. Onshore and offshore wind will receive 1.0 ROC/MWh and 1.5 ROC/MWh respectively. However, it is expected that most existing generating stations will be able to continue to claim 1.0 ROC/MWh after the introduction of the banding, given the Energy Bill, in what will become the new section 32E of the Electricity Act 1989, introduces a power for the Secretary of State to make transitional provisions in relation to existing projects. The Secretary of State can, in the Order, provide for periodic review of the bands or provide for a review on the occurrence of certain trigger events. The Explanatory Notes cite, by way of example, an "emergency" review where there is a significant change in grid connection costs, a new support scheme is introduced, a new technology comes forward or there is over compliance with the obligation (the so-called "ski-slope" mechanism).
The majority of the new provisions are only enabling provisions, leaving the Secretary of State to implement the detail of the obligation, the banding and the buy-out fund, in a new Renewables Obligation Order after a further statutory consultation process. Those reliant on a healthy ROC price to support projects will however be pleased to note that the primary legislation still prescribes what is a "renewable source" for these purposes, and continues to expressly exclude nuclear fuel. The new Renewable Obligation Order implementing these provisions is expected to be in force by 1 April 2009.
The Government has stated that the development of offshore renewable energy generation will make a major contribution towards meeting its renewable energy targets. Offshore electricity transmission networks will be required to transfer electricity from offshore renewable generating stations to the onshore networks. Several billion pounds worth of new investment is needed for the transmission infrastructure to carry this energy ashore, and a new regulatory and licensing regime for offshore transmission is being established to deliver this investment.
The substantive legislative provisions that will extend the licensing regime of the Electricity Act 1989 to offshore activities were enacted by the Energy Act 2004, but have not yet been brought into force. Once in force, the Department for Business, Enterprise and Regulatory Reform (BERR) will be able to make amendments to the licences of National Grid Transco (intended to be the offshore system operator) and other transmission licence holders, to provide for offshore transmission. The 2004 Act also provided Ofgem with delegated powers to provide for a competitive tender process for the construction and maintenance of offshore transmission assets. Part 2 of the Energy Bill will supplement this regulation making power with additional provision to allow Ofgem to recover the cost of the tender process from applicants for a transmission licence or the person making the connection request (eg. a wind farm developer).
It is BERR's intention that the generation licence and the transmission assets should be held by separate legal entities. The Bill consequently includes detailed provisions for the transfer of property, rights and liabilities by means of a statutory transfer scheme, referred to as a property scheme. These provisions will impact on projects already built or under construction at the time a tender exercise is held, requiring developers to divest their transmission assets to the successful tenderer (the offshore transmission asset owner) on terms determined by Ofgem in the absence of a negotiated agreement. The property scheme provisions include wide ranging powers for Ofgem to acquire information, and to determine the amount of compensation that should be payable by the new transmission licensee to the developer (or vice versa) or to a third party who is adversely affected by the scheme. Any person affected by the scheme has a right of appeal to the Competition Appeal Tribunal who will have the power to suspend the scheme or make other interim arrangements.
Further information about the tender process can be found in Ofgem's Regulatory Policy Update Published on 14 January 2008. Despite being included within the Part 2 of the Bill, under the heading of renewable power, the offshore transmission regime and the tender process should be equally applicable to any offshore generation – including the proposed offshore gas fired plant.
Decommissioning of Renewable Energy Installations
Pursuant to international obligations under the United Nations Convention on the Law of the Sea (UNCLOS), redundant offshore installations must be removed from the seabed to ensure safety of navigation and to ensure the preservation of fisheries and the marine environment. Under the current scheme for renewable energy installations, contained in the Energy Act 2004, the Secretary of State may require a person (or persons) responsible for constructing, extending, operating or using an offshore renewable energy installation to submit a decommissioning programme, and require that a person to carry out the programme.
Chapter 2 of Part 3 of the Bill strengthens the Energy Act 2004 provisions by:
- enabling the Secretary of State to issue a decommissioning notice to an associate (in line with the existing provisions for offshore oil and gas installations) in the event the Secretary of State is not satisfied with the plan provided by the developer;
- protecting funds set aside for decommissioning from a general body of creditors; and
- providing additional powers to require financial and other information from developers and associated companies.
Offshore Storage of Gas
Gas Importation and Storage Zones
Part 1 of the Energy Bill extends the ability of the UK to claim sovereign rights within its exclusive economic zone (an area extending beyond the 12 nautical miles of the UK's territorial waters up to a further 188 nautical miles within the UK's continental shelf) for the importation of and storage of gas including CO2. This is to be known as a Gas Importation and Storage Zone. This approach mirrors the steps taken in the Energy Act 2004 to establish Renewable Energy Zones for the purpose of offshore renewable projects and forms the basis on which the importation and storage of gas (in the form of LNG, or otherwise) can be regulated by the UK in these waters.
Storage of Natural Gas
In recognition of the UK's declining indigenous gas reserves, and the need to ensure that sufficient gas supply projects come to fruition to allow for LNG imports and commercial and strategic gas storage, steps have been taken in the Bill to attempt to reduce the administrative burden, and legal uncertainty, arising from the current consenting requirements, by creating a specific regulatory regime. Under Chapter 2 of Part 1 of the Bill, a licence will be required for gas storage or unloading within the territorial sea (including Scotland) or a Gas Importation and Storage Zone for:
- the recovery of stored gas;
- the conversion of a natural feature for storage;
- related exploration activities, and
- the establishment and maintenance of any installation for any of these purposes.
Once in force, the carrying out of any of these activities without a licence, or the failure to comply with certain terms of the licence, will be a criminal offence, punishable by a fine. There is provision which allows the terms of the licence – including its duration – to correspond with the terms of any Crown Estate lease, or authorisation, in respect of the development.
BERR may make regulations setting out the requirements for licence applications and the terms and conditions of licences. There is also the power to issue Model Clauses to apply to all new licences. In addition to criminal sanctions, BERR will also have the ability to give a direction to the licence holder in the event of a licence breach, and step in, or provide for a third party to step in, to take action to comply with the direction.
The Bill also contains specific provisions to avoid the recovery of stored gas falling within the petroleum licensing regime.
Storage of Carbon Dioxide
The Government has confirmed its commitment to the development of carbon capture and storage technology – at least as regards a full scale demonstration project – which is expected to lead to future commercial deployment. Chapter 3 of Part 1 of the Energy Bill contains a new regulatory regime for the offshore storage of CO2 that largely mirrors the natural gas storage regime outlined above, but with a few notable differences. The new provisions are widely drafted and require a licence to be obtained prior to carrying out any of the following activities within the territorial sea (other than adjacent to Scotland) or waters within one of the new Gas Imports and Storage Zones:
- the storage of CO2, either with the view to its permanent disposal, or as an interim measure;
- the conversion of a natural feature for CO2 storage;
- exploration for a storage site; and
- the establishment or maintenance of an installation for any of those purposes.
Once in force, carrying out any of these activities without a licence, or failure to comply with certain terms of the licence – including record keeping requirements – will be a criminal offence, giving rise to substantial fines and, in the case of storage or conversion of a storage site without a licence, custodial penalties. Interestingly, and in contrast to the provisions of the storage of natural gas, no prohibition is included in the Bill on the removal of CO2 from a storage site.
BERR may make regulations setting out the requirements for licence applications and the terms and conditions of licences including provision for financial security to be provided by the applicant at the application stage, once the licence is granted and on termination of the licence, and giving rights to modify the licence conditions (with or without consent). In addition to criminal sanctions, BERR will also have the ability to give a direction to the licence holder in the event of a licence breach, and step in, or provide for a third party to step in, to take action to comply with the direction.
There are also specific regulation making powers enabling BERR to make general provisions in relation to the termination of licences, including a requirement to make financial arrangements in relation to a closed site and to impose obligations on the Government in respect of the CO2 storage site after the termination of the licence.
In addition to the new licensing requirement, the Bill applies the provisions on Part 4 of the Petroleum Act 1998 to any offshore structure installed for the purpose of CO2 storage activities, giving BERR the power to require the operator to decommission any installations in a timely manner once operations have permanently ceased. This will include the enhanced provisions relating to decommissioning plans, and the provision of financial information, that are to be introduced by Chapter 3 of Part 3 of the Bill, although BERR is able to modify the application of that regime to CO2 storage activities by regulations.
Provision is also made to exclude the use of CO2 for enhanced oil recovery (EOR) or enhanced gas recovery operations from the licensing requirements, unless the Secretary of State extends the provisions by order. The Explanatory Notes state that the Government intends to use this power to include EOR operations that are benefiting from credits under the EU emissions trading scheme (once CO2 storage projects are included in the EU ETS).
Oil & Gas Licensing and Infrastructure
Decommissioning of Oil & Gas Installations
Chapter 3 of Part 3 of the Bill contains provision in relation to the decommissioning of oil and gas installations, amending Part 4 of the Petroleum Act 1998. Whilst significant, these do not amount to an overhaul of the current decommissioning regime, rather they are an enhancement of the current regime to give the Government greater comfort that decommissioning obligations will be met in the future and will not fall on the Government or the tax payer. The Bill's provisions have the result that financial information (such as up to date management information) and security for decommissioning may be requested by the Secretary of State at an earlier stage than previously required.
At present, a licensee, member of a joint operating agreement or an owner of an offshore installation (other than as security, eg, a bank) can be served a section 29 notice requiring the submission of an abandonment programme. A section 29 notice can also be served on related persons such as parent companies or other associated companies. The Bill extends the categories of persons to whom a section 29 notice can be served to include:
- a corporate member of an LLP where it is an associated party; or
- a licensee who has attempted to transfer an interest in a licence to another party without the Secretary of State's prior approval.
Importantly, in relation to the categories of persons who can be served with a section 29 notice, the Bill provides that owners of installations will no longer benefit from the prior provision which had the effect that they could not be served with a section 29 notice where the Secretary of State was satisfied that adequate arrangements had been made by other persons. The Bill's Explanatory Notes suggest that given the increasing use of floating production systems and the change of their ownership during the life of a field this change is required to spread risk to new owners with an interest in an installation.
Currently, the Secretary of State has no power to obtain financial information to assess potential decommissioning obligations until after a section 29 notice has been served. This is changed by the Bill to assist the Secretary of State to determine whether to serve a section 29 notice on a person or add a person to an existing approved abandonment programme. In addition, at present, security can only be requested once an abandonment programme has been approved (typically at the end of the life of a field). The Bill enables the Secretary of State, following consultation with the Treasury, to require action to be taken, such as the provision of security, where a section 29 notice has been served potentially well in advance of any abandonment programme approval.
The Bill also disapplies the Insolvency Act 1986 to safeguard decommissioning funds in the event of insolvency. This means that funds set aside for abandonment will not be available to the general body of creditors where any funds have been set aside in a trust or other such arrangement.
The changes to the decommissioning regime are likely to have the greatest impact on the increasing number of smaller players on the UKCS. Costs of obtaining, and maintaining, security for decommissioning will need to be factored into companies' plans earlier than they might otherwise have been. Those persons potentially subject to a section 29 notice will need to review and assess their preparedness to meet the requirements of the decommissioning regime proposed by the Bill.
The Bill also includes provisions to cover the decommissioning of wells, reinforcing the existing Model Clause provisions dealing with the plugging of wells. As in the case of the Bill's provisions dealing with offshore installations, the Bill empowers the Secretary of State to obtain financial information or documents from a person who has drilled or started drilling a well (being any well the drilling of which commences on or after the date on which the provision comes into force, whether under a petroleum licence or a natural gas storage or unloading licence). If the information or documents are not provided within a specified time, or the Secretary of State has received the requested information or documents but is not satisfied that the person will be capable of plugging and abandoning the well, the Secretary of State can, following consultation with the Treasury, require action to be taken. The Bill's Explanatory Notes suggest that, by implication, such action could include the provision of security to ensure that a well is appropriately plugged and abandoned. However the Bill does not restrict the type of action that may be required. Failure to comply is a criminal offence, although it will be a defence to show that all due diligence was exercised to avoid causing the offence. Related amendments to the Model Clauses which regulate petroleum licences are included in the Bill. These amendments give the Secretary of State power to require the plugging of a well provided that no petroleum has been extracted from it and the licensee's rights in respect of the area in which the well is drilled do not expire within one month of the day on which the notice is given.
Third Party Access
Part 4 of the Bill contains new provisions and extends the existing regimes (contained in the Pipelines Act 1962, the Gas Act 1995 and the Petroleum Act 1998) relating to third party access to oil and gas infrastructure. The changes are intended to fill the perceived gaps in the application of the existing provisions to the chain of upstream petroleum infrastructure, notably oil processing facilities (limited to initial blending and other treatment to produce stabilised crude oil or other hydrocarbon liquids in a state that they can be sold), gas processing facilities (including liquification plants and loading facilities), services associated with pipelines such as fuel or power, or access to works or apparatus. The provisions also provide the power to require an increase in pipeline capacity by means of modifying apparatus or works, or installing a new connection to the pipeline.
While the stated intention is to exclude "downstream infrastructure" from these provisions – such as oil refineries and the distribution and storage networks required to get oil products and gas to customers – the proposed distinction is not clearly set out in the legislation.
The Bill contains proposed changes to the Model Clauses which govern petroleum licences. Companies active on the UKCS need to be aware of them, particularly given their potential interaction with the proposed changes to the decommissioning regime.
The changes impact on three mains areas:
- the transfer of a licence interest without the Secretary of State's consent;
- the Secretary of State's powers in respect of the partial revocation of a licence; and
- abandonment and plugging of wells.
The changes in relation to abandonment and plugging of wells are noted above. The provisions in respect of the transfer of a licence interest without the Secretary of State's consent have the effect that the Secretary of State can, by notice, direct that the rights in the relevant licence interest revert to the transferor. The Sectary of State's notice cannot be given more than 3 months after the Secretary of State learns of the transfer. The Bill does not make any further provision as to the nature of this re-transfer, or measures to protect third parties, and may give rise to difficult issues in practice.
The provisions giving the Secretary of State a power to partially revoke a multi-party licence apply in the event of specified insolvency events or a change of control effecting one of the parties. Importantly, where a licence is revoked in relation to one person, it will continue to apply to the licensees who may have little or no ability to avoid an increased share of costs under the licence.
Energy Reports, Metering, Electrical Safety and Nuclear Information
Part 5 of the Bill includes a number of miscellaneous provisions:
- amendments to a number of the Government's existing reporting requirements to remove some of the overlapping requirements and to provide greater flexibility to fit in with the anticipated carbon budget reporting under the Climate Change Bill;
- transferring certain functions of Ofgem in relation to the accuracy of gas and electricity meters to the Secretary of State, to formalise the arrangement that currently exists with the National Weights and Measures Laboratory;
- transferring the functions of the Secretary of State relating to electrical safety under the Electricity Safety, Quality and Continuity Regulations 2002 to the Health and Safety Executive, formalising the administrative arrangements in place since October 2006, giving rise to stronger sanctions for breach of the regulations, and giving the HSE the power to amend the regulations; and
- elevating the status of sensitive nuclear information relating to uranium enrichment, and the places where such information is stored, by invoking provisions of the Official Secrets Acts and the Anti-Terrorism, Crime and Security Act 2001.
More legislation on the horizon
The Bill, together with the remaining provisions of the Energy Act 2004, will make or enable changes across the entire UK energy industry and can be expected to be followed swiftly by a host of new regulations and replacement Orders issued by the relevant statutory bodies.
While a number of the provisions have been keenly awaited, providing some legal certainty and a framework for substantial new investment, particularly in relation to offshore gas and CO2 storage, the regulatory burden of the measures should not be underestimated. The extent of the financial security that may be required and the criminal sanctions that accompany many of the new provisions will need careful consideration.
It should also be noted that the publication of the Bill comes a mere two weeks before the expected publication of a raft of measures to be taken at EU level affecting a number of the key policy areas covered by the Bill, and most probably leading to the substantial further legislative and regulatory measures for the industry in the near term.